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Hinds Howard

Principal, Associate Portfolio Manager, Infrastructure, CBRE Clarion

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Week Thoughts: A Quiet Place

It was a quiet week across the market.  Midstream, MLPs, utilities, the S&P 500 and oil prices were all plus or minus less than 1%.  Midstream earnings season re-starts this week after a pause for the KMI analyst day last week.  EPD, MMP, TGE and a few others report 4Q results late in the week.  Expectations have come down with lower commodity prices since 3Q results, but Midstream results should still show progress on cash flow growth, self-funding and de-leveraging initiatives.

Midstream’s bounce off the bottom has happened, and seasonal January enthusiasm helped with the follow-through.  We find ourselves in a very similar position to late January last year.  Those of us who experienced the tumult that followed are bracing from muscle memory at this point.

After so many false starts since 2015, its hard for midstream investors to feel confident that 2019’s January rally will be different.  It is a little bit like the 2018 film “A Quiet Place”, the story of a family that survives in a post-apocalypse world where most humans have been killed by monsters attracted to sound.  They have to walk like ninjas through rural terrain, because any noise could attract the monsters.

Being a midstream investor today feels similar.  Being bullish midstream has been like making a loud noise in that film.  But unlike that film’s conclusion, there is no magic one-time solution to slay the monsters, the all-clear signal will materialize slowly with execution, one quarter at a time.

Investors aren’t the only ones walking on egg shells.  Management teams appear hesitant to try anything too radical like M&A or a change in distribution policy that might upset the recent positive tilt.

Management teams also appear uncertain with capital allocation.  There has been increasing discussion over what to do with excess cash flow, which feels premature for most midstream companies.  I think the investor base would like to confirm that they can generate excess cash flow first.  Beyond that, management teams should have a strong opinion/vision about what the best use of that cash is for the company and go with that.

But management teams appear to be struggling with identifying the optimum mix of debt paydown, dividend growth and buybacks.  I think something like either one of the following would be fine: “we’ll keep paying down debt as we scour the market for good opportunities to use our precious capital” or “we’ll cross that bridge when we get there, our focus now is on growing cash flow such that we someday have excessive excess cash”.

Winners & Losers

MMLP had another strong week despite no further details on the ethane export project that was reported on last week.  Beyond that, it seems like distribution announcements led to some of the moves in both directions.  SHLX raised its distribution, CCR held its distribution flat.  In the bottom 5, SRLP pre-released weak results and ENLK was down apparently due to the merger with ENLC that closed Friday.  The shipping names like TOO and GMLP may have been weak on distribution cuts from smaller peers.

As noted above, MMLP repeated at the top and as a result pulled into the top spot on the YTD leaderboard.  Back-to-back top 5 finishes for SHLX launched it into the top 5 YTD.  Only 3 MLPs are negative so far this year.  Only 4 MLPs are negative so far this year, and each of the top 5 have rallied 25%+.

General Partners and Midstream Corporations

In the midstream corporation bucket, there weren’t many winners.  AMGP and WMB stand out.  TGE outperformed as well, maybe helped by the JV announcement with KMI.  ENLC, like ENLK, had a rough week.

ENLC went form best to worst.  AMGP and WMB repeated in the top 5, while SEMG repeated in the bottom 5.  On the YTD leaderboard, only one in the group is negative, with median returns up 15%, well ahead of the midstream sector benchmarks.

Canadian Midstream

Canada, like U.S. midstream, was pretty boring this week.  No news, smaller stocks underperformed the big boys.  KML outperformed, helped by the Kinder Morgan analyst day.

Large caps in Canada have rebounded in 2019, with TRP and ENB out in front early on.

News of the (Midstream) World

Another slow news week for midstream.  No blockbuster M&A, no big simplifications.  As the dust continues to settle on chaotic sector-wide simplifications and reorganizations, perhaps we can look forward to more calm weeks like this for a while here as the aggressive management teams push through a period of necessary re-armament before pursuing future conquests.

Capital Markets

  • None.

Growth Projects / M&A

  • Tallgrass Energy (TGE) and Kinder Morgan (KMI) announced exclusive agreement for Rockies crude oil transportation service to downstream markets (press release)
    • The proposed venture would include both existing and newly constructed assets
    • TGE would contribute Pony Express and KMI would contribute portions of its Wyoming Intrastate Company and Cheyenne Plains Gas Pipeline which will be converted to crude service
    • 200 miles of new crude oil pipeline would be constructed to serve Cushing, OK
    • The combined system is expected to have capacity of 800,000 bpd of light crude oil and 150,000 bpd of heavy crude oil
    • Combined project is expected to provide initial service as early as H2 of 2020
  • EnLink Midstream Partners (ENLK) unitholders voted to approve the proposed merger agreement by ENLC (press release)

Other

  • ENLK to be removed from Alerian Indexes in special rebalancing after close Friday (press release)
  • DM to be removed from Alerian Indexes in special rebalancing after close Monday (press release)

Distribution Announcements

  • 18 distribution announcements this week.
    • SDLP reduced its distribution down from a dime to a penny, after suspending its distribution back in 2017 for 4 quarters and reinstating at a dime starting in 1Q 2018
    • DLNG reduced by 75%, after reducing by 41% three quarters ago
    • SMLP was notable in maintaining its distribution, despite trading at 18% yield
    • Drop-down MLPs sticking to their previously announced plans to extravagantly grow distributions, with not a single one willing to try something radical like halting growth to set up self-funded drop-downs